Rachel Reeves may be forced to make new cuts to public spending according to her March “spring forecast” as a rise in government borrowing costs risks the Chancellor breaking his own financial rules.
With the government under pressure over the economy, City analysts warned that Britain’s long-term borrowing costs have reached their highest level since 1998, wiping out almost all of the £10 billion buffer set aside by the Chancellor in the autumn budget. There is a risk of.
The yield on Britain’s 30-year debt – actually the interest rate – rose 0.4 percentage points to 5.22%, just above the peak reached in 2022 after Liz Truss sent shock waves through financial markets following her mini-budget, which Has reached the highest level in 27 years. ,
Government borrowing costs have surged around the world in recent weeks as investors weigh the possibility of extremely high inflation that would prompt the world’s most powerful central banks to step back from cutting interest rates. Investors also fear that the policies of newly elected US President Donald Trump may further increase inflationary pressure.
Growth in the UK is on track to stagnate in the second half of last year, while inflation remains above the Bank of England’s 2% target – limiting scope for cutting borrowing costs.
Economists said that if the recent rise in bond yields is sustained, it will increase the government’s debt service costs and could prompt the Office for Budget Responsibility (OBR) to decide whether Reeves will use his fiscal budget to balance the day-to-day. On his way to breaking the rules. Day to day expenses with taxes till 2029-30.
“This suggests that the recent rise in borrowing costs has wiped out £8.9bn of the Chancellor’s £9.9bn headroom,” said Ruth Gregory, deputy chief UK economist at consultancy Capital Economics.
While as little as £1 billion would be left after the latest volatility in bond markets, a further rise of just 0.06 percentage points in 20-year borrowing costs would blow away all that money.
“This means Reeves may soon face the dire choice of breaking his fiscal rules or announcing more tax increases and/or exercising restraint on spending at a time when the economy is already weak,” Gregory said. “
Reeves is expected to present an updated OBR forecast on the economy and public finances to Parliament on 26 March. He has indicated that he is unlikely to announce tax and spending changes, saying he is committed to one major fiscal event a year to give greater stability to households and businesses.
City analysts have questioned whether the Chancellor will miss the opportunity to take corrective action in the event of the OBR’s disastrous decision – leading to speculation that Reeves could raise taxes.
However, the Chancellor has pledged not to raise taxes further after announcing £40 billion of revenue-raising measures in his autumn budget. The Treasury said on Tuesday that its fiscal rules were non-negotiable, indicating that if any adjustments were made they would come through spending cuts.
“We are not going to pre-empt the OBR’s forecast; However, no one should doubt the Chancellor’s commitment to economic stability and strong public finances. That’s why meeting fiscal rules is non-negotiable,” a Treasury spokesperson said.
“The Chancellor has been clear that she will not seek a repeat of the October Budget and is now focusing on eliminating waste in public spending and growing the economy through the spending review.”
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The rise in long-term borrowing costs came as the Treasury’s Office of Debt Management Sold £2.25 billion of new 30-year bonds at a yield of 5.2%The highest level of 30-year gilt yields since May 1998, when Gordon Brown was Chancellor.
The bank forecasts zero growth in the UK economy in the final three months of 2024 and warns that inflation will remain above its 2% target until at least 2027. The economy shrank for the second month in October, while revised figures show zero growth in the third quarter.
Investors have placed their bets on a deep rate cut from the central bank, with financial markets now expecting only two cuts in 2025, compared with four a few months ago.
US 10-year bond yields hit an eight-month high on Tuesday amid investor concerns over Trump’s policies and ahead of a Treasury auction of $39bn (£31.2bn) of new debt.
Eurozone borrowing costs also rose after data this week showed inflation rose to 2.4% in December, dimming expectations of a bigger rate cut from the European Central Bank later this month.